Is there uncertainty over the US$?

Interest rate outlook aside, the flight to safety is boosting dollar strength which will rise on a wider

FOR the second time since July, President Donald Trump is complaining about the strength of the US dollar.

This certainly has traders, who expect a few more US interest rate hikes, on their guard for any possible selling of dollars or the pursuit of a weak dollar policy.

Trump had even taken a swipe at Fed chairman Jerome Powell whom he had expected to be a “cheap money Fed chairman.”

Generally, the strong dollar is expected to prevail these two years, as US rates approach the neutral level which is neither boosting nor retarding the economy.

In between are Trump noises and those of trade war for which the latest round of low level talks between the United States and China yielded no progress.

Since last year, Trump had gone from wanting a strong to weak dollar; in April last year, he was worried that the dollar was “going too strong” but in January, he said “ultimately, I want to see a strong dollar.”

“Trump’s comments about too strong a dollar will definitely weigh on traders’ minds,” said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.

The dollar fell last Friday when Powell said at Jackson Hole that gradual rate hikes were likely if growth stayed strong, and there did not seem to be “an elevated risk of overheating.”

While Powell did not react to Trump’s criticism, two top Fed officials had said earlier their decisions on rates would not be affected by Trump’s outburst on the dollar.

The mighty dollar is boosted, among other things, by rising rates in response to fiscal stimulus (US$1.5 trillion in tax cuts), and the flight to safe haven assets amid emerging markets (EM) turmoil.

In view of its fundamentals and political risks, the dollar’s gains may not be sustainable.

Weakening the prospects for the dollar is the possibility of the US trade deficit getting larger, following earlier tax cuts that boost spending, said Suhaimi Illias, group chief economist, Maybank Investment Bank.

Political risk may also be a drag on the dollar, as a potentially “split” Congress following the November mid-term election, will complicate policy making already confused by an unpredictable president.

Further capping the gains on the dollar is the lower use of it as a reserve and payment currency.

Investors watch for the Fed’s guidance on rate hikes to assess the current level of dollar strength.

The pace of dollar strengthening may be mild on a hawkish but less aggressive path of rate hikes.

That supports AmBank Research’s view of two more rate hikes next year, when some fundamentally strong EM currencies may strengthen.

Investors also stay alert to any changes in the tone from the Fed, should it get too hawkish, as that would add pressure to EM currencies.

Should the Fed become too dovish, preferring low rates, it will be perceived as having limited room to raise rates and noises like fiscal and current account deficits will emerge, causing the dollar to weaken.

Interest rate outlook aside, the flight to safety is boosting dollar strength which will rise on a wider “risk off” sentiment towards EMs.

The lack of severe contagion from the plunge in the Turkish lira, and earlier in the Argentine peso, has led to a selective “risk off” in EMs.

But warnings of crisis hitting risky EM investment strategies and structures should be taken seriously.

Wall Street may drop temporarily if Trump is impeached but EMs face uncertain prospects; his potential successor’s policies especially in relation to tariffs and sanctions, are yet unknown.

While Danny Wong, CEO, Areca Capital, considers it potentially positive for EMs led by China, Pong Teng Siew, head of research, Inter-Pacific Securities, warns of the possible continuation of a playing field where EMs will always be subservient to rich countries.

Some of these “unfair” practices include the building of tariff walls (that further enrich the wealthy nations), offshoring of production without technology transfer and wanting EMs to remain as markets for multinationals from rich countries.

From the three previous impeachment attempts, there is no pattern of market reaction.

In the possible case of Trump, Lee Heng Guie, executive director, Socio Economic Research Centre, expects higher volatility and mixed asset market performance in bonds and equities, linked to expectations of policy change.

A potential President Mike Pence is expected to support the same business friendly policies – although possibly without the trade wars and turmoil.

Analysts are said to be mostly sceptical if Trump is in any real danger.

But Trump has been warned that the “countdown” to impeachment has begun after his former lawyer implicated him in crimes committed in the 2016 election.

Columnist Yap Leng Kuen is hoping for the best.